The impact of external and internal corporate governance mechanisms on agency costs

2019 ◽  
Vol 19 (1) ◽  
pp. 1-22 ◽  
Author(s):  
Jonas Schäuble
Keyword(s):  
Corporate Governance ◽  
Agency Costs ◽  
Governance Mechanisms ◽  
Content Type ◽  
Frontier Analysis ◽  
Audit Firm ◽  
Audit Market ◽  
Corporate Governance Mechanisms ◽  
The Us ◽  
The Impact

Purpose The purpose of this paper is to investigate the impact of external and internal corporate governance mechanisms on agency costs. Design/methodology/approach The author uses data from German firms that were listed in the regulated market of the Frankfurt Stock exchange during 2006-2011. Agency costs were measured using stochastic frontier analysis, a relatively new approach to estimate agency costs. The regression analysis is applied to test the model. Findings The results indicate that an industry specialized audit firm, the presence of a large audit firm, abnormal audit fees, management ownership and variable management compensation are significantly negatively associated with the level of a firms’ agency costs. In contrast, this seems not to be true for the existence of an audit committee for which the results of the paper document a non-significant association. Originality/value The paper contributes to the existing literature in several ways. First, the research design is to the best of the authors’ knowledge the first that investigates the influence of different corporate governance mechanisms on the level of agency costs. Second, previous studies are mainly focused on the US audit market. This focus on the US audit market leaves uncertainties regarding the direction and magnitude of the empirical relationship in the European and German environmental context. Finally, the paper provides initial empirical evidence for a sample of German IFRS listed companies (IFRS – International Financial Reporting Standards).

The impact of board characteristics and ownership identity on agency costs and firm performance: UK evidence

2018 ◽  
Vol 18 (6) ◽  
pp. 1147-1176 ◽  
Author(s):  
Bahaaeldin Samir Allam
Keyword(s):  
Corporate Governance ◽  
Firm Performance ◽  
Agency Costs ◽  
Economic Conditions ◽  
Agency Conflicts ◽  
Governance Mechanisms ◽  
Content Type ◽  
Board Characteristics ◽  
Corporate Governance Mechanisms ◽  
The Impact

PurposeThis paper aims to provide a twofold empirical comparison: first, a comparison between the impact of corporate governance mechanisms on agency costs proxies and firm performance measures, and second, this comparison was used before and after the 2008 financial crisis, capturing two different economic states.Design/methodology/approachPanel regression methods were applied to two data sets of non-financial firms incorporated in the FTSE ALL-Share index over the period 2005-2011.FindingsThe results provide evidence that not all mechanisms lead to lower agency conflicts and/or higher firm performance. Ownership identity has a significant impact and the role of the governance mechanisms changes with the changes in the economic conditions surrounding the firm.Research limitations/implicationsThe results lend support to the notion that forcing a certain code of practice on firms to follow could compel them to move away from conflict reduction governance structures.Originality/valueTo the best of the authors’ knowledge, this is the first paper to provide a comparison of empirical evidence for the impact of board characteristics and ownership identity on agency costs and firm performance by using a comprehensive set of corporate governance mechanisms. This comparison challenges the prior studies that use performance as an indirect proxy for lower agency costs. Additionally, it compares the impact of the governance mechanisms during two different economic conditions.

The impact of board independency, CEO duality and CEO fixed compensation on M&A performance

2017 ◽  
Vol 17 (5) ◽  
pp. 947-971 ◽  
Author(s):  
Emanuele Teti ◽  
Alberto Dell’Acqua ◽  
Leonardo Etro ◽  
Michele Volpe
Keyword(s):  
Corporate Governance ◽  
Positive Influence ◽  
Governance Mechanisms ◽  
Ceo Duality ◽  
Content Type ◽  
Good Corporate Governance ◽  
Corporate Governance Mechanisms ◽  
The Us ◽  
The Impact

Purpose This study aims to examine whether particular corporate governance mechanisms influence the performance of mergers and acquisitions. Design/methodology/approach Regression analyses investigating 1,596 recent acquisitions in the US market completed over the five-year period from 2009 to 2013 are performed. Findings The results show that board independency, CEO duality and level of CEO fixed compensation have an impact on the return of acquisitions. Moreover, the findings indicate that acquisitions significantly create value for bidders delivering a positive cumulative abnormal return upon announcement. Finally, also focusing on the 690 relative larger deals, there is a clear evidence of a positive influence of good corporate governance mechanisms over the quality of acquisitions completed. Originality/value To our knowledge, this is the first paper trying to identify corporate governance mechanisms related to the best acquisition decisions, by using specifically the three corporate governance variables (CEO duality, CEO fixed compensation and board independency).

Corporate governance and risk in cross-listed and Canadian only companies

2019 ◽  
Vol 57 (10) ◽  
pp. 2740-2757 ◽  
Author(s):  
Atreya Chakraborty ◽  
Lucia Gao ◽  
Shahbaz Sheikh
Keyword(s):  
Corporate Governance ◽  
Differential Effect ◽  
Composite Index ◽  
Governance Mechanism ◽  
Firm Risk ◽  
Governance Mechanisms ◽  
Content Type ◽  
Listed Firms ◽  
Corporate Governance Mechanisms ◽  
The Impact

Purpose The purpose of this paper is to investigate if there is a differential effect of corporate governance mechanisms on firm risk in Canadian companies cross-listed on US markets and Canadian companies not cross-listed (Canadian only companies). Design/methodology/approach Using a sample comprised of all Canadian companies included in the S&P/TSX Composite Index for the period 2009–2014, this study applies OLS and fixed effect regressions to investigate the effect of corporate governance mechanisms on firm risk. Interaction variables between governance mechanisms and the cross-listing status are used to examine if this effect is different for cross-listed firms. Findings Results indicate that the effect of board characteristics such as size, independence and proportion of female directors remains the same in both cross-listed and not cross-listed firms. CEO duality and insider equity ownership impact firm risk only in cross-listed companies, while institutional shareholdings, environmental, social and governance disclosure and family control affect firm risk in Canadian only firms. Overall, the empirical results indicate that some governance mechanisms impact firm risk only in firms that cross-list, while others are well-suited for Canadian only firms. Practical implications This study suggests that some of the differences between Canadian companies that cross-list and the Canadian companies that do not cross-list in US stock markets may change the impact of governance mechanisms on firm risk. Therefore, these findings have important implications for the design of governance mechanisms in Canadian firms. Since some of these differences are common to other economies, the conclusions can be extended to companies in other countries with similar governance structures. Originality/value Although previous studies have investigated the effect of governance mechanism on firm risk, this is the first paper that studies the differential effect for companies that cross-list in US markets. Specifically, differences in the ownership structure, firm control and in the regulatory and institutional environment, may explain this differential effect. Unlike most of the previous studies that focus on the effect of individual governance mechanisms, this study uses several mechanisms and their interactions at the same time.

Corporate governance and underpricing of small and medium enterprises IPOs in India

2020 ◽  
Vol 20 (3) ◽  
pp. 503-525
Author(s):  
Nischay Arora ◽  
Balwinder Singh
Keyword(s):  
Corporate Governance ◽  
Small And Medium Enterprises ◽  
Curvilinear Relationship ◽  
Board Structure ◽  
Governance Mechanisms ◽  
Content Type ◽  
Explanatory Variables ◽  
Corporate Governance Mechanisms ◽  
Medium Enterprises ◽  
The Impact

Purpose The purpose of the paper is to examine the impact of corporate governance mechanisms, i.e. board structure and ownership structure on the underpricing of small and medium enterprises (SME) IPOs in India. Design/methodology/approach Most of the extant empirical research studies have either pivoted on mainstream IPOs or SMEs IPOs in developed economies, but the present study examines 200 SME IPOs issued during Feb 2012 to April 2017. Multiple regressions have been used to examine the impact of the corporate governance mechanisms on raw return (RR). Furthermore, robustness of the results has been verified through the employment of market-adjusted excess return (MAER) as an additional proxy of underpricing. Findings The results highlight that board size, inverse of board committees, board independence, board age, board directorships positively, and top ten shareholding negatively influence RR. Further, direction of promoter ownership variable indicates curvilinear relationship with underpricing. Other explanatory variables used in model lack statistical validity. Similar results have been obtained when variables were regressed against MAER with related board members being additionally significant in model. Practical implications The findings suggest that Indian investors do take cues from board structure and ownership patterns for making investment decisions in small- and medium-sized firms. Further, the results are also helpful to top management in structuring their boards. Originality/value The present research enriches SME IPOs underpricing literature because the impact of corporate governance mechanisms on unadjusted returns is relatively under explored particularly within the context of small- and medium-sized firms.

The impact of corporate governance and ownership structure reforms on earnings quality in China

2015 ◽  
Vol 23 (2) ◽  
pp. 169-198 ◽  
Author(s):  
Xu_Dong Ji ◽  
Kamran Ahmed ◽  
Wei Lu
Keyword(s):  
Corporate Governance ◽  
Ownership Structure ◽  
Earnings Quality ◽  
Future Research ◽  
Governance Mechanisms ◽  
Content Type ◽  
Listed Firms ◽  
Ownership Structures ◽  
Corporate Governance Mechanisms ◽  
The Impact

Purpose – The purpose of this paper is to investigate the effect of corporate governance and ownership structures on earnings quality in China both prior and subsequent to two important corporate reforms: the code of corporate governance (CCG) in 2002 and the split share structure reform (SSR) in 2005. Design/methodology/approach – This study utilises informativeness of earnings (earnings response coefficient), conditional accounting conservatism and managerial discretionary accruals to assess earnings quality using 12,267 firm-year observations over 11 years from 2000 to 2010. Further, two dummy variables for measuring the changes of CCG and SSR are employed to estimate the effects of CCG and SSR reforms on earnings quality via OLS regression. Findings – This study finds that the promulgation of the CCG in 2002 has had a positive impact, but the SSR reform in 2005 has had little effect on listed firms’ earnings quality in China. These results hold good after controlling for a number of ownership, governance and other variables and estimating models with multiple measures of earnings’ quality. Research limitations/implications – Future research could focus on how western style corporate governance mechanisms have been constrained by the old management systems and governmental dominated ownership structures in Chinese listed firms. The conclusion is that simply coping Western corporate governance model is not suitable for every country. Practical implications – The results will assist Chinese regulators in improving reporting quality, ownership structure and governance mechanisms in China. The results will help international investors better understand quality of financial information in China. Originality/value – This is the first to our knowledge that addresses the effects of major governance and ownership reforms together on accounting earnings quality and, thus, makes a significant contribution on understanding the effect of regulatory reforms on improving earnings quality. In doing so, it also indirectly assesses the effectiveness of western-style corporate governance mechanisms introduced in China.

The impact of corporate governance mechanisms on earnings management in Islamic banks in the Middle East region

2016 ◽  
Vol 7 (4) ◽  
pp. 318-348 ◽  
Author(s):  
Hounaida Mersni ◽  
Hakim Ben Othman
Keyword(s):  
Corporate Governance ◽  
Middle East ◽  
Earnings Management ◽  
Audit Committee ◽  
Islamic Banks ◽  
Governance Mechanisms ◽  
Loan Loss ◽  
Content Type ◽  
Corporate Governance Mechanisms ◽  
The Impact

Purpose The purpose of this paper is to examine whether corporate governance mechanisms affect the reporting of loan loss provisions by managers in Islamic banks in the Middle East region. Design/methodology/approach This empirical study uses balanced panel data from 20 Islamic banks, from seven Middle East countries for the period 2007 to 2011. The regression model is estimated using random effects specifications. Findings The empirical results show that discretionary loan loss provisions (DLLP) are negatively related to board size and the existence of an audit committee. Results also report a positive relationship between sharia board size and DLLP. This indicates that small sharia supervisory boards are more effective than larger ones, which could be due to the higher costs and negative effects of large groups on decision-making. Results also highlight that the existence of scholars with accounting knowledge sitting on the sharia board reduces discretionary behavior. Additional results provide evidence that an external sharia audit committee is also found to reduce discretion in Islamic banks. The conclusions are found to be robust to endogeneity issues and potentially omitted variables. Practical implications The findings are potentially useful for regulators and shareholders. Regulators could use the findings to focus on corporate governance mechanisms that restrain earnings management practices in Islamic banks and implement regulations to strengthen them. Additionally, this study gives shareholders further insight which enables them to better monitor the actions of managers and thus increase their control over their investments. Originality/value This study provides two contributions to the literature on Islamic banking. First, to the authors’ knowledge, this study is only the second piece of research focused on the impact of corporate governance on earnings management in Islamic banks. Second, the authors have examined the effect of some new corporate governance mechanisms that have not been studied previously in the research literature.

Does intellectual capital and corporate governance have an impact on annual report readability? Evidence from an emerging market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Tamanna Dalwai ◽  
Syeeda Shafiya Mohammadi ◽  
Gaitri Chugh ◽  
Mahdi Salehi
Keyword(s):  
Corporate Governance ◽  
Intellectual Capital ◽  
Annual Report ◽  
Emerging Market ◽  
Financial Sector ◽  
Governance Mechanisms ◽  
Content Type ◽  
Corporate Governance Mechanisms ◽  
Capital Efficiency ◽  
The Impact

PurposeThis study examines the impact of intellectual capital efficiency and corporate governance mechanisms on the annual report readability of Oman's financial sector companies.Design/methodology/approachThe study uses a sample of 150 firm-year observations of listed financial sector companies in the Muscat Securities Market, Oman, from 2014 to 2018. Flesch Reading ease and Flesch Kinkaid Index are used as proxies for annual report readability. As part of sensitivity analysis, the study also uses the natural logarithm of annual report pages as alternative readability measures. The investigation is conducted using random effects regression analysis and supported with system GMM estimation for robustness.FindingsThe findings of this study demonstrate a decrease in intellectual capital efficiency associated with better readability of annual reports for the financial sector firms. Alternatively, banks report a positive association of intellectual capital efficiency with the Flesch Reading ease score of the annual report. The structural capital and capital employed efficiency are also found to be negatively associated with annual report readability. Corporate governance mechanisms such as dispersed ownership and audit committee size also result in easy-to-read annual reports that support agency theory.Research limitations/implicationsThe research was conducted for financial firms of Oman, and thereby the findings can be generalized to the financial sector of countries with similar settings, such as the Gulf Cooperation Council (GCC) region.Practical implicationsThe policy implications arising from this study suggest a strengthening of the intellectual capital efficiency and corporate governance mechanisms to improve the readability of the firms and thereby increase investor confidence.Originality/valueThis paper's uniqueness is in the model used to investigate the impact of intellectual capital efficiency and corporate governance mechanisms on the annual report readability of an emerging market.

Corporate governance and fraudulent financial reporting

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Vahab Rostami ◽  
Leyla Rezaei
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Stock Exchange ◽  
Valuable Insight ◽  
Fraudulent Financial Reporting ◽  
Governance Mechanisms ◽  
Content Type ◽  
Corporate Governance Mechanisms ◽  
Financial Expertise ◽  
The Impact

Purpose This study aims to trace the impact of corporate governance and its mechanisms in preventing companies from turning to fraudulent financial reporting. Design/methodology/approach For this purpose, using the systematic elimination pattern, the information of 187 listed companies on the Tehran Stock Exchange over six years from 2013 to 2019 were collected, and the hypotheses were examined using a linear regression model. To measure fraudulent financial reporting, the adjusted model of Beneish (1999) was used to evaluate corporate governance. Its mechanisms based on nine corporate governance mechanisms, including board independence, board remuneration, CEO financial expertise, expertise in CEO industry, board financial expertise, board industry expertise, board effort, CEO duality and managerial ownership, have been examined. These mechanisms are calculated as a combined index of corporate governance. Findings The findings indicate that robust corporate governance significantly reduces companies’ intention toward fraudulent financial reporting. In the same way, a negative and significant relationship was observed between each of the nine corporate governance mechanisms, except for board compensation and fraudulent financial reporting. Originality/value This study’s findings provide valuable insight into the importance of strengthening companies to prevent companies’ managers from engaging in fraudulent financial reporting activities. Hence, it is suggested that professional references bodies more seriously follow the rules to dictate to companies for using and empowering their corporate governance.

Corporate governance mechanisms and agency costs: cross-country analysis

2016 ◽  
Vol 16 (2) ◽  
pp. 347-360 ◽  
Author(s):  
Tatiana Garanina ◽  
Elina Kaikova
Keyword(s):  
Corporate Governance ◽  
Agency Costs ◽  
Gender Diversity ◽  
Agency Cost ◽  
Negative Influence ◽  
Empirical Literature ◽  
Governance Mechanisms ◽  
Content Type ◽  
Corporate Governance Mechanisms ◽  
The Usa

Purpose The purpose of this paper is to investigate whether specific corporate governance mechanisms, such as board size, board composition, leverage and firm size, tend to mitigate agency cost occurrence in the USA, Russia and Norway. Design/methodology/approach The authors analyze the sample of 243 US, 196 Russian and 175 Norwegian joint stock companies for the period 2004-2012. The regression analysis is applied to test the models. Findings It is revealed that larger boards increase agency costs (measured by asset utilization ratio and asset liquidity ratio) in all sample companies. The proportion of female members has a very slight positive effect in US companies, a negative influence on agency costs in the Norwegian sample and is not significant in the Russian market. The authors find that the big Russian and US companies in the samples of this paper have lower agency costs. Practical implications The results of this paper show which agency-mitigation mechanisms work more effectively in companies operating in the analyzed countries characterized by specific corporate governance models. Originality/value The main contribution of this paper to the empirical literature is that it extends the stream of agency research by introducing new, emerging markets: represented by Scandinavian (depicted by the Norwegian sample) and Russian companies. Considering that each market – US, Norwegian and Russian – represents significant distinguishing features in their institutional framework, the paper provides an important research setting in which corporate governance mechanisms can be analyzed from the perspective of a country’s peculiar characteristics. Unlike other agency cost studies, this paper accounts for the gender diversity component in the companies and contributes to gender diversity issues.

Did corporate governance mechanisms affect earnings management? Further evidence from GCC Islamic banks

2017 ◽  
Vol 10 (1) ◽  
pp. 2-23 ◽  
Author(s):  
Mohamed Chakib Kolsi ◽  
Rihab Grassa
Keyword(s):  
Corporate Governance ◽  
Earnings Management ◽  
Negative Relationship ◽  
Governance Mechanisms ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provision ◽  
Corporate Governance Mechanisms ◽  
The Impact

Purpose The aim of this paper is to examine the impact of corporate governance mechanisms on earnings management practice for a sample of Gulf Cooperation Council (GCC) Islamic banks (IBs) using a new model of earnings management. Design/methodology/approach First, the authors estimate discretionary accruals based on loan loss provisions discretionary loan loss provision (DLLP) using the procedure derived from Jones’ (1991) original model. Second, the authors run a multivariate regression model to check the linkage between corporate governance characteristics and discretionary loan loss provision. Finally, the authors use an additional sensitivity check analysis to assess whether the results are robust to the estimation procedure and to other exogenous factors. Findings Using as sample of 26 IBs pertaining to the GCC region with a total of 223 firm-year observations and a nine-year period (2004-2012), the results are conclusive and show that first, IBs with large Shariah Board size manage less DLLP. Secondly, Accounting and Auditing Organization for Islamic Financial Institutions membership positively impacts earnings management through DLLP in IBs. Third, there is a negative relationship between boards of director’s independence the extent to which IBs manage DLLP. Fourth, the existence of block holders positively affects earnings management by IBs. Fifth, there is a negative relationship between audit committee meetings and DLLP. Finally, institutional ownership and bank size have no effect on earnings management through DLLPs. Research limitations/implications In this research, the authors do not take into account all governance factors that are supposed to impact earnings management in IBs. Future research should explore the impact of additional IBs governance structures including chief executive officer bonus, experience, gender and the extent to which IBs use real earnings management with Murabaha, Mudaraba and Musharaka transactions. Practical implications The paper is a very useful source of information that may provide relevant guidelines in helping the future development of corporate governance of IBs. In addition, the findings could prove to be useful for regulators because they are responsible for the acceptable level of corporate governance standards. Thus, they must consider strengthening governance mechanisms either through new legislation or stronger enforcement where earnings management is of such magnitude to that serious impedes information transparency and financial reporting quality of IBs. Originality/value This study associates the corporate governance characteristics with earnings management by IBs. The study contributes to the growing body of literature on earnings management and corporate governance in IBs. It should be useful to researchers, regulators, investors, analysts and creditors as well as other players in the capital markets, as it presents a new and important aspect that needs to be accounted for when assessing the quality of IBs’ accounting information in GCC countries.

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